An economy doesn’t run on nostalgia… November 28, 2018

cameron | Wednesday, November 28th, 2018 | Comments Off on An economy doesn’t run on nostalgia… November 28, 2018

Antiquated trade policy and the politicization of markets have been a concern to us the last year or two, and that concern is certainly not diminishing at the moment. Today’s Wall Street Journal published a good piece by their Editorial Board that hit on a recent and important issue. An excerpt of the piece is below, followed by a link to the full editorial.

—-

President Trump believes he can command markets like King Canute thought he could the tides. But General Motors has again exposed the inability of any politician to arrest the changes in technology and consumer tastes roiling the auto industry. GM said Monday it plans to eliminate 15% of its salaried workforce in North America and stop production at five plants that employ 6,700 workers, including one in storied Lordstown, Ohio. “We are taking these actions now while the company and the economy are strong to stay in front of a fast-changing market,” CEO Mary Barra said.

The U.S. auto maker plans to redeploy some $4.5 billion in annual savings to more profitable truck, electric-car and autonomous-vehicle manufacturing. Investors cheered by bidding up GM’s stock, but the President reacted like a spurned suitor. “You know, the United States saved General Motors and for her to take that company out of Ohio is not good,” he said Monday, adding Tuesday that he might end GM’s subsidies. GM shares promptly fell 2.6%.

GM is essentially following Ford and Fiat Chrysler by phasing out small-car production. Last year GM cut production by a third at Lordstown and nearly half at a plant in Oshawa, Ontario. Keeping these factories open at lower levels of output would waste human and physical capital that could be deployed to more productive and profitable units.

Boosting production of higher-margin vehicles is imperative as auto sales flatten after eight years of robust growth and rising interest rates curb demand. Material costs have also increased due to Mr. Trump’s steel and aluminum tariffs. GM said in July the tariffs could raise its costs by as much as $700 million this year, which is equal to the pay of about 9,400 employees.

Mr. Trump and Democrats seem to believe that with the right mix of tariffs and managed trade they can return to a U.S. economy built on steel and autos.